Endogenous Technological Change, Paul M. Romer 1990

Abstract

This essay tries to study, solve mathematically and interpret the solution of the Romer’s endogenous technological growth model that was published in 1990. This model is one of the first that treats growth as an endogenous procedure in contrast to the preexisting publications that treated growth as exogenous.The basic idea is that technological progress is the force that drives growth. The research sector, which is the first sector of the economy, uses human capital to produce knowledge in the form of designs. These designs are considered as non-rival, partially excludable inputs in the intermediate good sector, the second sector of the economy, and have a legal structure of infinitely lived patents. This legal form leads to a monopolistic competition environment in the sector. Finally the producer durables, that the intermediate good sector produces, are sold at a monopolistic price to the final output sector, which produces the final good.The whole procedure of the economic growth begins from the research sector, because knowledge is produced there and combined with the fact that there are positive external effects in the sector, the more knowledge is produced the more lasting the growth is.